Is Mexico ready for its next big storm or earthquake?

With its long trail of death and destruction spanning the Caribbean and the US East Coast, hurricane Sandy will surely be remembered as one of the most damaging storms in recent history. As I write this blog, Sandy has claimed over 100 lives and caused more than US$50 billion in damages.

After ravaging Cuba, Haiti and Jamaica, Sandy took a turn to the Northeast, instead of pursuing a westerly trajectory, sparing the Gulf of Mexico coastline from its deadly punch.

But what if the “perfect storm” had gone Mexico's way? Or, God forbid, a late-season storm formed in the still warm waters of the gulf and hit Mexico’s coastal cities.

Would Mexico be able to weather such a storm?

It’s difficult to hypothesize about the impact of a catastrophe that has not actually happened, or for that matter, won’t ever happen. But, it is fair to say that Mexico is much better positioned than ever before to cope with the likes of hurricane Sandy.

Here's why. In the past few years the country has done a great deal of work to prepare itself for the next big natural hazard, focusing on two key areas: loss prediction and risk financing and insurance.

Mexico has long realized that its vast territory sits in one of the most hazard-prone areas in the world. Let me give you some numbers for perspective.

More than 90 earthquakes of a magnitude 4.0 or higher impact Mexicans each year–that’s 6 percent of all earthquakes in the world. All told, more than 50 percent of the nation’s territory is exposed to strong quakes. On top of that there’s the storms.

Tropical cyclones are the most dangerous meteorological hazards, especially along the Gulf of Mexico and the Caribbean Sea, where population and infrastructure growth is faster than the country's average.

Faced with so many costly geological and meteorological challenges, Mexico has been forced to come up with innovative responses.

To start off, the country has made huge strides in assessing risk through what is known as probabilistic calculation.

If R-FONDEN, R-AVISA or SICCAVA, just look like an alphabet soup to you, don’t get too hung up about it or try to make sense out of it. Just take comfort in the fact that those impenetrable acronyms form the cornerstone of Mexico’s pioneering approach to preventing the risk of natural disasters.

This is almost stuff for the geeks to be frank with you. But it’s still worth a quick look, because it’s so valuable.

R-AVISA is a storm tracking system linked to NOAA[2] that estimates material and human losses. R-FONDEN, calculates losses from natural events anywhere in Mexico, and SICCAVA is a web-based tool that automates reporting of damages from the minute disasters strike. All these mechanisms allow for quick mobilization of disaster response and prevention resources, as explained in the study Improving the Assessment of Disaster Risks to Strenghten Financial Resilience.[3]

Technology-wise Mexico is ahead of the pack in disaster risk prevention and damage control. Mexicans, and Latin Americans as a whole, know very well the price of not being proactive about this. The cumulative cost of disasters over the past decade has been a staggering US$ 25 billion.

Natural disasters pose a significant burden on the country’s federal budget. Which is cue to address the second pillar of Mexico’s successful disaster strategy: risk insurance.

Just this past month Mexico issued a brand new catastrophe bond, building on the success of its 2009 issuance. The MultiCat Mexico 2012, is a US$315 million instrument providing coverage against earthquakes and hurricanes. The beauty of these bonds is that they allow governments to get funds and protection from financial markets rather than drawing from public coffers.

So, for all intents and purposes Mexico is securing funding for disaster relief from external sources even before any event has taken place.

As its 2009 predecessor, the 2012 Multicat provides insurance coverage against earthquake risk in five geographic regions and hurricane risk in three regions along the Atlantic and Pacific coasts.

Let me also say that Mexico is building a strong reputation in the catastrophe bond market. On this particular transaction they got much better terms than in 2009 and, overall, it was highly competitive in comparison with traditional reinsurance. Obviously this was also because there is a growing catastrophe bond market, and investor appetite to diversify from the main risks covered by other catastrophe bonds (US wind and earthquake risk). But there’s no denying Mexico is an increasingly attractive proposition within these very competitive markets.

We are deeply invested in Mexico’s attempts to become a more resilient and safer place. That’s why we are fully behind the country’s efforts to develop a comprehensive disaster risk management strategy under “Programa de Prevención y Atención de Desastres Naturales.” On a global scale, we are supporting the government to position disaster risk management as a priority topic in the 2012 G20 agenda.[4]

Mexicans say, wisely, “mejor prevenir que lamentar” or “better safe than sorry”. In this context, it means prevention and good policies save lives and money.